Intrinsic Value

Amidst the recent Bitcoin surge, the (Cartel-administered) Precious Metals plunge and accelerated debauchery of countless fiat currencies, analysis of the term “intrinsic value” has seen a resurgence of its own. Not a day goes by without widespread commentary on what constitutes money – such as mine from Tuesday; which in my view, could not be a more positive development for the real money camp. Right now, I’m just happy to see active debate on the topic; albeit, for the time being, most commentators do not appear to truly understand its meaning.

In today’s Generation X-dominated financial environment, perhaps 80% of participants have never even heard of the gold standard; let alone, a monetary system based on anything but fiat currency. Frankly, I’d bet the vast majority, if quizzed directly, couldn’t tell you the dollar is theoretically “backed” by the full faith and credit of the U.S. government. And thus, if that same quiz posed the question as to the definition of intrinsic value, the preponderance of respondents would undoubtedly concur, “the difference between an option’s strike price and the actual market price.”

However, in truth, intrinsic value has an entirely different meaning. According to Wikipedia, it refers to the “value of an object, good, or service contained within itself.” In other words, what worth does it have? In some ways, these measures are subjective; as indeed, some items have innate, intangible value. An originally signed Babe Ruth baseball, for example; given its uniqueness, historical significance, and universal recognition. Otherwise, it’s just a worthless, used baseball. However, such outlying examples aside, intrinsic value can typically be calculated objectively; be it regarding stocks, bonds, or commodities. For financial assets, one can look to the underlying assets and/or earnings power of the issuing entity; while for commodities, the cost of production typically serves as an effective, self-correcting floor. And by self-correcting, I mean that when prices rise well above the cost of production, the market is typically flooded with supply – while conversely, when prices fall below the cost of production, supply typically dries up. This is not to say objective and subjective metrics cannot co-exist – as they often do; but instead, that the any rational investment decision-making process should start with intrinsic value.

When it comes to money, there’s a good reason why all 599 previous fiat currencies have failed; and thus, why the current 182 will as well. In a nutshell, they are backed by nothing but the aforementioned “full faith and credit” of issuing governments; or more accurately, in many cases privately-owned Central banks with keys to the printing press. In the absence of a gold standard, there are no limits on how many “currency units” are printed; and sadly, today’s “Big Brother” world has become so secretive, there isn’t even an effective method of accounting for how many exist. Objectively, the “intrinsic value” of a dollar bill is the cost of ink, paper, manufacturing, accounting, and transportation. However, the vast majority of “dollars” are now digital – connoting near zero material and production costs; with the only remaining “intrinsic value” being the value assigned to the “full faith and credit” of the issuer.

In the real world, where creditworthiness is merit-based, “full faith and credit” is based on one’s personal balance sheet, income statement, and cash flows. In other words, if you are over-indebted and cash poor – with a poor earnings outlook, to boot – it is unlikely one would accept your “IOU” as payment. This, by the way, is exactly what dollars, Euros, and Yen are – liabilities of the issuing government.

When viewing sovereign issuers, the concept is no different; except that, in the absence of a gold standard, governments have zero restrictions on how much currency they print. In other words, it doesn’t matter how much debt they incur, how weak their economic prospects, how negative their deficits, or how violent their foreign policy; as irrespective, they can print unlimited currency to monetize operations. To an extent, of course – as unfortunately, such unnatural policy has the unintended consequence of inflation. And given that fiat currency is a Ponzi scheme to begin with, hyperinflation inevitably rears its ugly head.

From a pure investment standpoint, the only chanceof sovereign “full faith and credit” having any real meaning is if the issuer has little debt, favorable demographics, strong growth prospects, positive trade and budgetary balances, and a track record of safeguarding monetary value. Unfortunately, given today’s “final currency war” has only just begun, it’s safe to say not a single nation would meet this criteria. In other words, “full faith and credit” is at best a hollow concept; and thus, no fiat currency has any intrinsic value to speak of.

That said it’s time to ask what inspired this particular topic, on this particular day. Actually, it’s two events; starting with yet another egregiously negligent comment from the “Maestro” himself, Alan Greenspan. Just one day after grilling him in “No Bubbles Here” – for averring this year’s equity surge is not a bubble; he deemed Bitcoin a bubble in thisinterview. This, from the man who on repeated occasions, over several decades – particularly after the 2000 and 2008 crashes his own policies created – claimed “it is impossible to identify a bubble until after it has burst.”

However, it’s not the idiocy of him making yet another “uneducated guess” of the future that was my primary focus; but instead, his reasoning. To wit, his claim of a bubble in Bitcoin was predicated on its lack of intrinsic value; which in his words, you’d have to “stretch your imagination” to infer. Furthermore, when asked if Bitcoin can be the “new gold,” he flat out answered, “No, it has no intrinsic value.”

Moving on, the original Money-Printer-in-Chief averred:

In order for currencies to be exchangeable, they have to be backed by something.

When we were on the gold standard, gold and silver had intrinsic value – which made people willing to exchange goods and services (for them), with no question. Alternatively, when we went into currencies, it was the backing of the currencies’ issuers – whose great credit standing meant his checks could circulate as money.

So here we have the man who managed the nation’s currency operations for two decades admitting gold and silver have true intrinsic value; while at the same time, defining the dollar’s intrinsic value as the “great credit standing” of the U.S. government. Tell me, objective reader; with $17 trillion ofnational debt, $5 trillion more “off balance sheet”, $200 trillion of unfunded liabilities, $1 trillion annual deficits, a 35-year low Labor Participation Rate, stagnant real wages for four decades, a hollowed out manufacturing base – yielding a “New Employment Paradigm” of part-time, minimum wage service jobs – and an international reputation for warmongering, spying, and imperialism, how do you rate America’s “credit standing?” Oh yeah, I forget to mention the Fed holding interest rates well below the inflation rate for five straight years, and overtly printing $85 billion each month to monetize toxic Treasury and mortgage-backed bonds.

Conversely, what intangible premium would you add to gold and silvers’ tangible intrinsic values of $1,200-$1,500/oz. and $22-$28/oz., respectively? Do their 5,000 year track records of monetary value hold any value? Or the fact that global Central banks are acquiring them hand over fist – particularly wealthy ones like China, Russia, and the Arab states? How about the fact that all the world’s currencies have lost essentially all their purchasing power against Precious Metals; as well as the aforementioned 599, which ultimately collapsed?

OK, I think you get my point. However, I wanted to add one more; as coincidentally, Gonzalo Lira published a fantastic piece today, regarding the various pitfalls associated with Bitcoin; which, by the way, I’ll be discussing in detail in this afternoon’s Miles Franklin Audioblog with Mike Krieger. Actually, I loved the article until the very end, when Lira made the following, counterintuitive statement.

Precious metals do not have intrinsic value. However, there always has been and always will be a large group of heterogeneous people who will accept precious metals—gold, silver, platinum—in payment for some good or service.

For one, gold and silver indeed have intrinsic values, as described above. Moreover, gold and silver, “in and of themselves,” have been used as money for millennia; not to mention, as ornaments, status symbols, and industrial components.” More importantly, as Lira himself states, people have been trading both fiat currencies and items of real value for Precious Metals since time immemorial; in my view, de facto proof of their intrinsic value.

Hopefully, the bastardized modern notions of “intrinsic value” in the currency, PM, and Bitcoin markets have been effectively refuted. If not, I urge you to do your own diligence; as ultimately, your financial survival depends on it. As for me, essentially my entire liquid net worth is held in the form of the only real money the world has ever known; which in my view, cannot be challenged by any incarnation of financial alchemy – or, for that matter, cyber-technology.

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